On the 31st of August we woke up to the news that Futuregrowth, South Africa’s largest debt manager, was suspending its funding to six state-owned enterprises (SOEs).
The decision immediately impacted three SOEs with regard to new loans under discussions and roll-over of existing loans to the tune of R1.8billion. This is certainly a significant amount of money and it remains unclear if this will be extended to other credit arrangements. The decision was followed by Denmark based Jyske Bank, though details of their intentions are unclear.
All that we know is that Futuregrowth is a significant contributor to infrastructure funding and SOEs such as Transnet, Sanral, IDC, DBSA and Eskom are clients of Futuregrowth.
All these entities have a material level of importance to the logistics industry and the economy of the country. Generally, logistics thrives on increased supply and demand to which the SOEs are a key stimulus. More directly, some of the SOEs like Transnet and Sanral own the infrastructure such as rail, ports and roads. The perceived risk by the fund managers if it materialises, will make funding to SOEs expensive and unaffordable, resulting in delays and cancellation of the much-needed increased capacity of our logistics infrastructure. This will drive up the cost of logistics and render South Africa uncompetitive as an investment destination.
There has been major criticism of Futuregrowth’s decision which has been labelled political. In any other country, when the state president and the cabinet announces increased focus on SOEs through a task team, this would be expected to be well received. However, in South Africa it is perceived as increased risk by those who have financial exposure to the SOEs. One can easily draw a conclusion that this is tantamount to a vote of no confidence by business in the government of the day. This assumption may very well be true in the context of declining business confidence. The Business Confidence Index released by the South African Chamber of Commerce and Industry (Sacci) in August 2016 reported a decline of 3.1 index points to 92.3. This was blamed on, amongst other issues, the negative sentiments surrounding important financial institutions such as Treasury and Reserve Bank.
It can also be argued that Futuregrowth did not need to go public on this matter. Some have labelled Futuregrowth’s action as grand standing. They further argue that it would have been adequate for Futuregrowth to perfect its securities against a prevailing risk. We also know that Furturegrowth has been at pains to woo its peers on the Associations of Savings and Investments South Africa (ASISA) to take a stance on this matter in support of its decision. This move by Futuregrowth was met by a rebuke by ASISA and a warning that an attempt to gather support from other fund managers could be a possible contravention of competition law. This has been seen as an attempt by Furturegrowth to bolster its case prior to its scheduled meeting with the government minister responsible for the SOEs.
The failure of these SOEs will have a direct negative impact on the logistics industry. The roads, rail and ports form the core of the logistics industry. The prevailing uncertainty on government policy implementation and knee-jerk response from the markets poses a major risk to the logistics industry and the businesses that it supports. The sooner a general cooperative model between government and business is achieved the better for the industry and economy.
